When's the right time to pursue conventional financing?

By:Alexander BallingallSpecial to the Star, Published on Tue May 08 2012

Entrepreneurship is tough. Ask Ryan Smolkin.

At 19, he wanted to start a business renting property in the student ghetto near Wilfred Laurier University. Looking for a loan, he walked into a bank.

He walked out with nothing.

Now 38, Smolkin is the founder of Smoke’s Poutinerie, a franchise that’s grown across the country to include 27 stores over the past three years. But he didn’t get to where he is with much help from the bank. In fact, Smolkin says it wasn’t until recently that he could rely on bankers for any significant loans or credit at all.

“It’s a grind. Banks in general are not supportive of entrepreneurs,” Smolkin contends. “I had to fight like a dog.”

So how does an aspiring business owner, without the blessing of an angel investor or a slew of capital to transform into equity, go about getting money from the bank? Is it even possible?

Yes, but it isn’t easy, and you’d better not walk in like you own the place. Peter Conrod, vice-president of client and business strategy at RBC in Toronto, says the worst thing new business owners can do is stride into a bank with too much confidence.

“Sometimes the emotions play a really heavy role,” he says. “It’s a good idea for them to seek (advice from) others.”

Bakr Ibrahim, a business professor at Concordia University who studies entrepreneurship, doesn’t recommend approaching the bank at all until at least six months after an entrepreneur has started a new business. That way they will be better prepared.

“After the first six or eight months of the operation, when they know exactly what’s needed of them—that’s when they (should) go the financing route,” says Ibrahim. “They have to show first that they have a viable concept.”
RBC’s Conrod agrees: “We’re always impressed when somebody’s done a lot of homework on their business idea.”

To increase one’s chances of receiving bank financing, Conrod recommends the use of government initiatives, such as the Canada Small Business Financing Program. Created in 1961, it helps small businesses by sharing default risks between the government and lending institutions.

And owners need to consider whether they need a large, lump sum loan or a line of credit.

Both Conrod and Ibrahim say that it depends on circumstance. Typically, it’s better to take a lump sum loan when looking to pay for a single, expensive asset, such as a large piece of equipment.

“If you have collateral, it’s cheaper to get a bank loan,” says Ibrahim.

Lines of credit, on the other hand, are better used for smaller, every-day expenses, because they provide the ability to borrow and repay repeatedly, says Conrod. Plus, the interest rates are lower.

But the bottom line is that, in order to be successful, entrepreneurs need solid strategy, guts and financial wherewithal—with or without the bank’s help.

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